Madame Lagarde basically says MMT is correct – not that she knew she was saying it!

Its Wednesday, so just a short blog post. I had a day of meetings and other commitments today. But we have some fun at the IMF to discuss (briefly). On April 11, 2019, IMF boss Madame Lagarde gave a press conference to open the 2019 Spring Meetings. The Transcript – includes the Madame waxing lyrical about Modern Monetary Theory (MMT). And you might have confused the press conference for a stand-up comedy routine except you would have to be ‘in the know’ to laugh. But the significant aspect of the conference came when a question from Japan focused on MMT. In attempting to put down our work, Madame Lagarde actually admitted that a situation where the government runs big fiscal deficits, has a large-scale and on-going public debt-issuance program, where the central bank buys substantial proportions of that issuance, apparently ‘works’ under conditions that the currency-issuing government can always control. MMT 101. QED. Have a laugh.

IMF Boss makes a fool of herself – again

There is growing interest in MMT and Japan after the Japanese Prime Minister Shinzo Abe, Finance Minister Taro Aso and Bank of Japan Haruhiko Kuroda all denied that “Japan is experimenting with” MMT.

The press reported that this august trio had (Source):

… also rejected the MMT view that countries with their own central banks and borrowing in their own currencies — like the U.S. and Japan — can’t go broke, and don’t need to worry about overspending so long as it’s not generating high inflation.

Another Japanese politician (in Opposition), one Takeshi Fujimaki, a former banker, claimed that the Japanese government would regret implementing the sort of “reflationary policies” that MMT proponents would advocate in the situation that Japan has found itself in after the massive property crash in the early 1990s.

He told the press:

MMT is “ridiculous” and “voodoo economics … [it] … absolutely no different … [from what Japan is doing]

So at least he gets that the Japanese government is using its currency-issuing capacity to the advantage of its citizens and rejecting the ‘sound finance’ types which would have it cut deficits by imposing austerity.

Of course, he gets it wrong by advocating austerity.

The interest about MMT and Japan is increasing though and I am doing an extended interview with the New York Times tomorrow about all this stuff given that I have followed Japan and its fiscal matters closely for many years.

Anyway, during the Press Conference, Madame Lagarde had the following interchange with a representative from the Japanese press:

QUESTION – Thank you very much. My question is about the Modern Money Theory (MMT).

Madame Lagarde – It applies in Japan as well?

QUESTION – We do not have much inflation ‑‑ United States, Europe, basically zero growth, low inflation. If we have low inflation, we can have much more debt. No problemo. No problem. How convincing is that theory to you? Is that OK to have more debt in the name of filling the gap between the poor and the rich? Thank you very much.

Madame Lagarde – We do not think that the Modern Monetary Theory is actually a panacea. There are very, very, very limited circumstances where it could work. We do not think that any country is, you know, currently in a position where that theory could actually deliver good value in a sustainable way.

So while it is tempting, when you look at the sort of mathematical modeling of it, and it seems to stand, there are big caveats about it, such as, if the country is in a liquidity trap, such as if there is deflation. Well, then in those circumstances, it could possibly work for a short period of time, probably, because interest rates stay low until such time when they start going up. And then it is a bit of a trap. So that would be our view.

All right.

All wrong!

But wait a moment!

Did she just say that the things that MMT proponents derive from their understanding of the way the monetary system operates actually work and their mathematical modelling proves it?

Sure did!

Madame Lagarde has probably not read anything about MMT other than some scattered stuff in the mainstream press and perhaps one of her lackey economists has told her a few things.

First, she doesn’t understand that MMT is not a regime but a window into the world of the monetary systems that operate all around the world.

In that sense, it can never be constructed as “a panacea”.

To think of it as a policy regime (“a panacea”) means that you don’t get the most fundamental aspects of our work.

Second, her claim that there are “very, very, very limited circumstances where it could work” response reinforces her ignorance.

It ‘works’ everywhere there is a currency-issuer and currency. How it ‘works’ depends on how the capacities of the currency-issuer are made operational. But it ‘works’ everywhere.

Third, what she is talking about are certain policy applications that are in place.

And as Takeshi Fujimaki recognises, Japan has adopted a policy stance where the government sector has chosen to provide substantial support to the non-government sector to allow it to save overall while still allowing the economy to grow.

The Government has focused on avoiding recessions and keeping unemployment low rather than be seduced by the wall of criticism that its deficits are too large, or its debt will send it broke, or that bond markets will stop buying the debt.

The Japanese Government knows that:

1. The Bank of Japan can keep short-term interest rates around zero for as long as it wants – which means the longer-maturity investment rates are always low.

2. The Bank of Japan can always buy any amount of the public debt that is issued and never face insolvency.

3. That deficits can be as large as is required to sustain high levels of employment and simultaneously fund the desire of the non-government sector to save.

4. That inflation will not follow from this sort of monetary stance while there are idle resources that can be brought into productive use through appropriately scaled fiscal deficits.

That knowledge is in direct contradiction to the myths that the mainstream macroeconomists disseminate but core MMT.

So the denial of the Japanese political elite (including the central bank boss) that they are doing this and that MMT is crazy stupid is very funny.

Fourth, according to Madame Lagarde, the IMF has done macroeconomic modelling of our work according to her and it “seems to stand” up!

I would be interested in them releasing that work for public scrutiny.

And it- by which I presume we mean Japanese-style fiscal deficits, on-going public debt-issuance and central bank buying substantial proportions of that issuance (almost all the public debt issued since December 2012 has been purchased by the Bank of Japan) – apparently ‘works’ as long as interest rates stay low.

Which means that it ‘works’ whenever the government wants it to ‘work’ because as Japan has demonstrated since the early 1990s, the Bank of Japan can keep interest rates low for as long it as wants.

In other words, whether this sort of policy ‘works’ has nothing to do with the ‘market’ and is not a special case. It is purely a function of the policy choice that the Government makes and the cooperation within the Government between Treasury/Finance and the central bank).

I am sure Madame Lagarde didn’t understand that her attempted put down was actually an endorsement of the insights that MMT provides.

Music from the past …

I thought it would be good to have some Hammond organ sounds to celebrate that the IMF is now endorsing our work.

So I dug out and old Spectrum album and my teenage years and beyond came back in a flash.

The first music festival I went to was the – Launching Place Festival – which was held in the little country town in Victoria, about 62 kms out of Melbourne up in mountains to the north. The festival was held on the banks of the Yarra River.

It was the second Australian festival held and the first in my home state of Victoria. The first was at Ourimbah (NSW) not far from where I mostly live now.

The Launching Place Festival was held on December 31, 1970 and we drove up there in an old battered VW Beetle.

It rained heavily and constantly throughout the day which made attendance quite tough. We were covered in mud as it was in a rural setting.

Only six bands appeared at the one-day festival.

One of them was the Melbourne band – Spectrum – which was a rather experimental rock-type band with a big Hammond organ sound from Lee Neale, a sole guitar player (Mike Rudd) on a Stratocaster and he played without a plectrum (which was rare in those days), Mark Kennedy on drums (who became one of the premier players of his time), and Bill Putt on bass (now deceased). I cannot remember whether Mark Kennedy was still in the band by the time they came to the Festival (he was definitely replaced around then by Ray Arnott).

But Mark Kennedy was definitely on their first album which was released in 1971.

You can hear the whole first album – Spectrum Part 1.

They wrote a song in two parts to promote the Launching Place Festival – Launching Place Parts I and II. Part II came out as a single in 1970 prior to the Festival.

You can here the original versions on their first album (linked above). Part I is very progressive (starts at 18:42). Part II features the beautiful organ sound they had.

Here is a live recording of Part II from the ABC Television show – GTK.

The quality is rough. But it also brings back the memory of that show, which was a nightly TV program (Monday to Thursday) on our national broadcaster, the ABC. The show aired, from memory at 18.50 just before the 7 o’clock nightly News broadcast.

GTK ran for 6 odd years.

The 10-minute format for the show was introduced because many US programs only ran for less than 30 minutes because of advertisements. The ABC has always been free of ads.

This appearance by Spectrum was recorded in December 1971 and one of the features of the show was that bands played live rather than mimed to their records.

The whole album is worth listening to as it reflects the progressive nature of the Melbourne music scene at that time.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

This Post Has 20 Comments

  1. Not long before Madame Self-Regarde joins the ‘I knew it all along’ brigade!

    The woman who said ‘I’ve got my money back’ to the Greek disaster ( whilst people guffawed will never admit she’s inflicted needless suffering on millions.

    So even if she admits MMT is ‘correct’ she will never reflect back on the disaster the IMF has unleashed.

  2. Dear Bill,

    “All the public debt has been bought by the Bank of Japan”.

    I follow your daily comments. I don’t understand everything, however, and I don’t understand this comment. Can you help me? Possibly an earlier piece on this point?

    Sorry if I appear stupid, but I feel it’s best to ask!

    Dave Kelley.

  3. Thanks Bill. Yes I was wondering too like Dave Kelley what is the purpose of the BoJ purchasing public debt?

    I remember Spectrum. Thanks for the link.

    Kevin Phelan

  4. Dave Kelley,
    “All the public debt has been bought by the Bank of Japan” = (as I understand) the bonds sold by the government to private buyers have in turn been bought from those private buyers by the central bank (and for a government that has its own currency, the central bank and treasury of the government, together, are the government sector). The sale of bonds to the private buyers, can be compared with a citizen taking some money that’s in a bank current account and transfering it to a fixed term interest account, except that the fixed term interest account is at the central bank. The citizen has a bit of paper proving his ownership of the bond (a financial asset: his entitlement to get his money back in the future) while his bank account is reduced by the same amount. At the same time, this transaction is represented at the central bank by a transfer of the cash reserves of the private bank held at the central bank from ordinary reserves to interest paying reserves. When the central bank buys the bond from the private holder, these transactions are reversed. Too much of this buy-back in the orthodox narrative is supposed to have awful consequences for the economy, but Japan proves this doesn’t stand up. Also, you might think that now that the central bank holds the bond, all the numbers recording its value at the treasury and central bank would be written out of the books, as central bank and treasury are the government sector, but this doesn’t happen: the bond continues to be included in the count of government ‘debt’, methinks for political purpose.

  5. Simon, Madame Self-Regarde. Very good. I have never seen her not make a complete ass of herself. She really is a repulsive character.

  6. “There are very, very, very limited circumstances where it could work.”
    Is this a Freudian slip? This comment is factual if you observe the IMF’s record with developing countries.
    Straight from the coal face: How are places like Argentina going these days? Surely they must be going <> well since they are advised by the IMF and following the EXACT opposite steps to the body of theories developed by MMT about such matters.

    Poverty rate: 32%, Urban poverty 14.3 million + 3 million in one year.
    Its in recession, has high unemployment, has high inflation and there is a bunch of Foreign Denominated dollars (50+ billion) aiding capital flight and public services are cut affecting women, children and the poor disproportionately.

    This Austerity is specified in the IMF’s agreement conditions so it must be a success ;-).
    IMF has never been internally consistent, its unable to learn from evidence within/external to its organisation. Lagarde continues to be a criminal and a mess of ideologies but ultimately subservient to elites.

  7. I would laugh along with you Bill; however, I’m too concerned that they will succeed with the inception of new, misleading narratives about MMT into public minds, which at this point only have very fragile understandings of the power of MMT , if any awareness at all.

    They can only delay the inevitable with those tactics, however delays are costly.

    I read that Ecuador was the very recent recipient of a fresh loan.

  8. “I read that Ecuador was the very recent recipient of a fresh loan.”

    Could that be Ecuador’s payoff from the USA, channelled via its creature the IMF, in return for kicking Assange out of its London embassy?

    Perish the thought! Merest coincidence.

  9. To: Patrick B

    Dear Patrick,

    I just read your reply to me, to my wife. She said “Yes”.

    I wish I had her knowledge!

    I’m going down to my allotment after dinner.

    Dave Kelley.

  10. “There are very, very, very limited circumstances where (MMT) could work” merely means, as Bill points out, that there have been very, very, very limited circumstances where a currency-sovereign nation has chosen to shape its economic policies by MMT principles (as Japan, at least in part, now seems to be doing). What is glaringly absent in all the mainstream attacks on MMT is one single concrete example of a currency-sovereign nation that HAS applied MMT principles and FAILED. That’s because there ain’t any.

  11. I still don’t understand a word Lagarde about liquidity trap and stuff and how that translates to solving low wages, under-employment, and unemployment.

    I don’t understand how monetary policy can save people from poverty.

    I don’t understand how tweaking interest rate will somehow create jobs or how is it relevant to anything really.

    Whenever they speak, its like they speak alien language, but MMT i can understand pretty well i’d think.

  12. Bill, as a fellow musician, I just lerved GTK and this Spectrum clip is brilliant! Wow, to think this music was being played in the early 1970s very encouraging! Inspiration, creativity and energy abounds!

    BTW, I lerve your work, Bill! 🙂

  13. @Dave Kelley:

    I think PatrickB is on the money with his detailed description of the issue. Also, on the upper right side of the blog you can browse the categories and read up on a lot of Japan-related posts.

    I’d say the short answer is that the BoJ/Government (treasury), as the currency sovereign, can buy anything that is available in its own currency and that includes the bonds it issued at some point in the past. Numbers change in the accounts of the seller and the buyer and that’s it.

    Having said that, it becomes evident, that the bond issuance is more a relic from the times under the gold standard/fixed exchange rates when governments had to tax or go into debt with the private sector or foreign countries to get their funding. Nowadays they simply provide an interest bearing saving opportunity for the private sector.

    So, bond issuance itself is not necessary to finance government action, as neoliberals will have you believe. However, making people believe that it is, is elementary to the narrative that we have to be kind to investors, i.e. the masters of the universe, or they will run with their money and we’ll be even poorer then. Of course, a person with even the most basic understanding of MMT would kindly show them the door and warn them about the danger of it hitting them in the back when it closes behind them.*

    “Too much of this buy-back in the orthodox narrative is supposed to have awful consequences for the economy, but Japan proves this doesn’t stand up.”

    I guess a real negative consecuence could be a rise in inflation if these now liquid assets are used for consumption. More likely though, it could fuel asset bubbles, since the bonds are probably held by wealthier individuals more prone to invest in e.g. real estate. Bill has a lot of posts here on the MMT proposals to counter high inflation. Reduce government spending and tax hikes are just two that come to mind. In regards to the bubble problem, sensible regulation and its consequent enforcement should do the trick.

    *Rich folks abroad with large amounts of your currency can indeed try to use it to bend the political and economical system in their favor, so measures to limit that influence might be necessary. However, this is neither new nor radical, as the regulation of e.g. Chinese investment in infrastructure in Europe or the EU shows (the current dispute with Huawei in the EU comes to mind as an example).

  14. I think we have to accept that Mme Self Regard (like it!) is being duplicitous.

    ‘Her’ IMF is a pawn of US foreign policy, asset stripping and enslaving countries which in many cases have been forced into difficulties by US economic sanctions and trading conditions. IMF loans (in Dollars) then lock the nation into eternal vassalage. At any time of its choosing the subject nation can be brought to heel by further US sanctions.

    She knows what she’s doing. Let’s not confuse ‘bad’ with ‘stupid’ here.

  15. Patrick B.

    “… this transaction is represented at the central bank by a transfer of the cash reserves of the private bank held at the central bank from ordinary reserves to interest paying reserves.”

    I’m coming into this at a late stage as I was away at a funeral yesterday.

    Your assessment is largely correct, but the above statement isn’t quite. The whole point is (in my understanding) that reserves are removed from one account at the CB and exchanged for bonds in a different account at the CB. There aren’t even any bits of paper with gold edges these days because it is all virtual. That said, not being an investor myself so I wouldn’t know, I presume a bondholder can get a statement of their account whenever they want.

  16. Bill, I remember Spectrum’s hit song “I ‘ll Be Gone”, but was more familiar with their reformation in Ariel. Remember listening to Ariel at a concert at the Castle Hill Shoground in either 1973 or 1974. Both bands were ahead of their time. A nice trip down memory lane!

  17. @Patrick

    Bill has a number of posts on bond issuance, cf

    A point to note is that central bank purchases of bonds can have little or no inflationary effect as the magnitude of private fiscal assets in not changed, just the composition.

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